Balance transfer: the best way to pay down card debt?

Transferring card debt can cut interest costs and buy you more time

If
you’re burdened with expensive credit card debt, applying for a no- or
low-interest balance transfer card can be a less-painful way to help you pay
down what you owe.

“Consolidating
balances onto a new card will help keep all your debt in one place, which will
enable you to better manage your payments,” said Brandie Farnam, certified
financial planner at LearnVest. “If you’re able to open a line of credit on a
card with a low or 0 percent APR balance-transfer offer, the interest savings
could be significant.”

Web
designer and blogger Patrick Antinozzi was able to utilize a credit card
balance transfer to more easily and cost-effectively reduce $14,000 of credit
card debt.

“I managed to pay it off after just seven months, and a big part of
what allowed me to do that was the fact that I transferred my balance from a 19 percent interest rate to a card with a 5
percent rate,” he said.

“My monthly
interest payments went from $300 per month to about $50 per month. I also took
advantage of a promotion my bank was offering that gave me 0 percent for six
months.”

If
you’re committed to paying down any lingering card debt, here’s how to tell if
a balance transfer will be wise:

You can qualify for a good balance
transfer card offer.

Transferring
card debt can cut interest costs and give you more time to pay down the debt,
but only if you have a strong credit score that qualifies you for the best balance transfer
card offers.

“Usually,
to qualify for 0 percent APR credit cards and balance transfer deals, you have
to have excellent credit or a score above 720,” said Farnam. You’ll also need
to qualify for a credit limit that will support the amount you want to transfer
to the new card without maxing it out, but generally there’s no way to know what credit limit you will receive.

Do
some research to learn what the best card offers require.

“Keep
an eye out for balance transfers with no fees, 0 percent interest during the
introductory period and a low rate after the intro period expires,” said Matt
Freeman, head of credit card products for Navy Federal Credit Union.

This is
where your credit score can really make a difference. “Make sure you select a
card that will give you enough time to pay down your balance in full,” he
added.

You can pay off the transferred debt
in the allotted time frame

Even
if you qualify for an outstanding balance transfer card offer, you need to have
a plan in place to promptly pay down the debt after the transfer is made – and to stick
with your plan.

"My monthly
interest payments went from $300 per month to about $50 per month. I also took
advantage of a promotion my bank was offering that gave me 0 percent for six
months."

“A
balance transfer will only save you money – and make sense for you – if you
plan on paying down the debt during the introductory grace period and make
diligent payments on time, every month,” Farnam said.

However, if the APR
after the promotional rate expires is lower than what you’re currently
paying, you’ll still save if you’ve got a balance left.

Before
you apply for that new balance transfer card, do a little math first.

For example, if
your new balance transfer card’s 0 percent rate offer lasts one year, “divide the total
amount – and don’t forget to add the transfer fee for each balance transfer – by 12 and that’s your monthly payment,” said
financial coach Martha Menard. A balance transfer
repayment calculator can show your balance transfer savings and the repayment
math, too.

Video: What is a balance transfer credit card?

Once
you know how much you’ll need to pay each month to get the balance transfer
paid off before the promotional rate ends, make sure that payment fits into your current budget. Making
a balance transfer should help ease your debt burden, not stretch you thinner financially.

“Let’s say that you’re transferring a balance of $4,000
and the intro period is 24 months,” Farnam said. “Can you make room in your
budget to set up automatic payments of more than $172 a month to pay it off in
full before the grace period expires?”

Account for balance
transfer fees

The balance transfer fee required by most balance
transfer deals is another factor worth considering. According to CreditCards.com’s 2017 balance transfer
survey,
most credit cards charge a fee for transfers, typically 3 percent of the
transaction or $5-$10, whichever is greater.

If you are transferring a
significant amount from one card or multiple amounts from several cards, the
fees could really diminish – or even eliminate – any potential debt repayment
cost savings.

“Read
the fine print, even on the 0 percent offers,” Freeman said. “Depending on the
situation, it could be in your best interest to choose a card with a 2.99
percent APR that doesn’t have a balance transfer fee over a 0 percent offer
with a 3 percent fee. In the long run, it could cost you more than you’re
saving.”

Again, doing the math will help you determine if the benefits of a balance transfer outweigh the fees. If the transaction fee equals more than what you’d pay in
interest on your original card over the same amount of time, the transfer isn’t
worth it.

Once you
make the transfer, don’t rack up debt again

If
you are making a transfer to get rid of costly, lingering credit card debt, don’t
make purchases with any of your cards
that you can’t pay off in full at the end of the month.

"Depending on the
situation, it could be in your best interest to choose a card with a 2.99
percent APR that doesn’t have a balance transfer fee over a 0 percent offer
with a 3 percent fee."

“Be
disciplined enough to not incur any additional credit card debt,” Menard said.
If the temptation of now-empty credit card limits is too strong, “Put the cards
away. Cut them up, freeze them in a container full of water, whatever you have
to do. If you can’t do that, then the balance transfer won’t help you. You’ll
just dig yourself deeper in debt.”

Be honest with yourself about the spending temptation a new
card will give you. You don’t want to get stuck in a debt trap making
purchases on top of trying to repay the debt you transferred.

“Why is this so bad? For one, the 0 percent APR may not apply to new purchases,
which means money you charge could accrue more debt, faster,” Farnam said.
For a balance transfer to really save you money, “Paying off that debt
should be your focus.” she added.

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